SME Finance

Treasury Committee

We now come to the Select Committee statement. The Chair of the Treasury Committee, the hon. Member for West Worcestershire (Dame Harriett Baldwin), will speak for up to 10 minutes, during which time no interventions may be taken. At the conclusion of her statement, I will call Members to ask questions on the subject of the statement. I emphasise that we want brief questions, not speeches, and that those questions should be directed to the Committee Chair, not the relevant Minister.

Thank you, Madam Deputy Speaker, for granting this wonderful opportunity to present the report that the Treasury Committee published yesterday on access to finance for small and medium-sized businesses.

As every Member will know, small and medium-sized enterprises form the backbone of the UK economy. All of us in our constituencies will be aware of amazing small and medium-sized businesses. In fact, 99% of the businesses in this country are small and medium-sized, which gives us an idea of how important they are. Well over half of our constituents who are employed work for SMEs. Access to finance for small and medium-sized businesses, which the Committee has been looking at, is therefore a really important issue. I want to highlight some of the points raised in our report. This is an opportunity not only for Members to hear those points but, I hope, for the Minister to take them on board.

No one can deny that, with the pandemic and the energy price crisis, the past five years have been an absolutely torrid time for everyone. SMEs have often been at the forefront and have experienced the brunt of those crises, but without the huge resources that larger businesses have to be able to cope. Through those crises, the Government took extraordinary steps to provide support in terms of access to finance for small and medium-sized businesses, but we are now in a different environment. In fact, all the evidence and data published this week show that small and medium-sized businesses are beginning to feel much greater confidence—we are seeing some real improvement there. Nevertheless, issues remain from that difficult time and also more structurally following financial regulation measures set up since the banking crash in 2008.

I want to flag up a few of the points that we made in our report. The first concerns the Business Banking Resolution Service, which was set up after the banking crisis and was designed to provide access to resolution, mediation and outcomes for businesses that were too large to access the Financial Ombudsman Service but had nevertheless been treated pretty badly during the financial crisis. I think it fair to say that the Committee formed the view that the Business Banking Resolution Service had not been a success. It is owned and run by the banks, which raises questions about conflicts of interests in the first place, or certainly the perception of a conflict of interests. Moreover, it has spent about £40 million during its lifetime and has awarded only £2 million worth of compensation, because it drew the access criteria so tightly that very few businesses were able to qualify. As a result, there were very unsatisfactory outcomes for businesses that used the resolution service because they could not access the Financial Ombudsman Service, and the Committee agrees that it should close as planned. We look to the Government to come up with a consultation on a new mechanism by the end of this calendar year.

I am on the Treasury Committee, and I commend my hon. Friend for her great chairmanship. She has already mentioned the need for transparency, and I am delighted that the Treasury will bring that forward, but I was particularly struck by how difficult it is to open accounts. Even for farmers, it can take multiple months. Most importantly of all, the PRA’s approach is going to choke the growth of many small businesses, and we need our small businesses to become much bigger for the prosperity of our country. Does my hon. Friend agree that the PRA really needs to understand the importance of this issue to ensure that the entire country prospers, which will only happen if small businesses prosper?

I agree with my right hon. Friend. Inflation is the worst tax on our economy and important steps are being taken by the independent Bank of England to raise interest rates, to make sure that inflation gets back to its target zone. That all seems to be on track. Monetary policy has been tightened already, and we see that in the environment in which our small and medium-sized businesses are working. They have been squeezed by higher interest rates, and the evidence we received showed that the acceptance rate for credit has fallen from 80% to 50%, so it does not feel like the right time to be tightening access to finance for small and medium-sized businesses through a change in regulations. It particularly does not feel like the right time to be doing so unilaterally, when the EU and the US are not following the Basel 3.1 rules.

I am also a member of the Treasury Committee, and I thank the Chair for all her hard work on this report.

On the overall question of the confidence of SMEs in their ability to access finance, the report raises some interesting figures. There was a £95 billion finance gap in large high street bank lending to SMEs between 2015 and 2022, alongside the softer pressures of SMEs fearing rejection in lending and the lack of trust in the lenders themselves. Will the Chair please provide an assessment of how she feels that appetite looks across the rest of this year and beyond? What tools are at our disposal to deal with the inherent caution in the SME lending market?

I thank my excellent colleague for his question. He is absolutely right that the inquiry received evidence on what I would describe as financial apathy. Small businesses sometimes choose not to borrow, choose not to grow, In fact, only 5% of small businesses that seek lending would even consider shopping around to find another provider if they were rejected by their main bank.

There is work to do to encourage and guide SMEs, and the British Business Bank has a very important role. It is not well enough known, which is probably holding back the growth of many excellent small businesses. I am so proud that our Committee has been able to champion this.

I am grateful to the Chair of the Treasury Committee for making this statement today. She will be aware that one of the main reasons why a lot of small businesses have to rely on bank funding is because bigger businesses do not pay their bills on time, and all too often do not pay their bills at all. A lot of small businesses in my constituency, particularly in construction-related work, tell me that they sometimes have to wait six months or more to get paid. That increases the risk factor for a bank, because it is much more likely that the small business will fail. Has the Committee looked at the problem, or does it intend to do so, where small businesses, particularly in the construction sector, are not paid for their work?

The hon. Gentleman makes an excellent point that everyone in this House will recognise as a challenge. Getting paid by bigger businesses is a bane of the lives of many small business owners. I know there has been a lot of work in the Department for Business and Trade, and the Government need to lead by example by promptly paying for services. The Committee heard evidence that small businesses continue to be frustrated by this.

I thank the Chair of the Treasury Committee for her statement and for answering questions.